New lending to the private sector is expected to accelerate by double digits to hit at least Sh300 billion this year but the impact on headline economic growth is likely to be felt from 2021.
In the 2020 economic outlook, fund manager ICEA Lion Asset Management said the consumer durables, manufacturing, trade and personal household segments are set to continue driving new loans growth as was the case in 2019.
The removal of the rate cap on loans in October 2019 has raised the prospects of the credit growth revival, especially to the Small and Medium Enterprise (SME) sector, which was deemed too risky to lend to by banks in the caps era.
Latest central bank data puts the rate of annual growth at 6.6 percent in October 2019.
“We estimate that net lending to the private sector tripled from Sh60 billion in 2018 to Sh200 billion in 2019. In 2020, we anticipate that net lending to the private sector will be at least Sh300 billion, which represents double-digit growth for the first time since 2015,” said ICEA Lion.
“Out of this, we expect credit of Sh50 billion to Sh100 billion to be offered SMEs in 2020.”
A healthy increase in new loans to the private sector is considered key to driving real economic growth, with the CBK putting the ideal rate at 12 to 15 percent.
The last time annual growth was in this range was in April 2016 (13.5 percent), before falling to single digit from June 2016 to date with a low of 1.4 percent in July 2017.
ICEA Lion said, however, there will be a lag before the positive effect of the improved credit access is felt in the growth of the economy, as businesses that have been forced to close or downsize by the rate cap will take time to get back on their feet.
“We expect 2020 to be the year of economic convalescence. The real economy is expected to start healing this year on the back of renewed private sector credit growth and also dependent on improved timeliness in payments to suppliers. However, the recovery is only likely to start being felt in the second half of the year and going into 2021,” said ICEA Lion Asset Management chief executive Einstein Kihanda.
The firm is, therefore, projecting that the economy will grow at 5.8 percent in 2020, similar to the estimated growth recorded in 2019.